File picture: Philimon Bulawayo
JOHANNESBURG - We have no illusion that Cyril Ramaphosa will bring a fairytale ending for the South African economy. 

We are all very much aware of our country’s structural challenges and the difficulty of fixing this. However, at least we now have signs of change and some hope for the future.

The Mining Charter is in the hands of Gwede Mantashe, and it can only be better than what was presented to us before. Coming from a low base, the possibility of better than expected economic growth and more business activity is probably there.

There is a renewed interest in domestically focused companies, which is evident in their share prices.

Hudaco is a company I have written about before. It is genuinely South African, and the share price has gained 18percent in the last three months. The full year to end November results were released on February 2 and showed their turnover rose 6.6percent to R5.9billion, headline earnings per share 2.8 percent to R12.56, and the dividend rose 7percent to 560c a share. Last year was a very tough one for South African companies, yet Hudaco managed to grow its headline earnings.

Nature of business

Hudaco specialises in importation and distribution of branded industrial and security products. Their operations are divided into three parts: bearings and power transmission products, powered products and security equipment.

Hudaco sources branded products, mainly on an exclusive basis, directly from leading international manufacturers, and to a lesser extent from local producers. It seeks out niche areas in markets where customers need and are prepared to pay for the value Hudaco adds to the products it distributes. The value added includes product specification, technical advice, application and installation training, and troubleshooting, combined with ready availability at a fair price.

The group has a network of specialised branches and independent distributors throughout southern Africa to ensure product availability to its customers. Except for DD Power, in which Deutz has a 30percent share, all Hudaco businesses are 15percent owned directly by BEE shareholders. It has a proud history of more than 120 years since J Hubert Davies saw the long-term business potential of the initial gold rush, and it now employs nearly 3000 people.

Changing strategy

Hudaco is still embracing its seven-year-old plan of cutting its mining exposure in favour of retail consumables. In 2010 consumable engineering products contributed 67percent, in 2016 just over 50percent, and 2017 saw it coming down to 39percent of profit. Although the mining and manufacturing sectors declined over the past 10 years, this division still generated cash.

The company spent R210million on acquisitions in the past year, yet also repaid R45m of bank borrowings. Hudaco’s consumer division contributed 61percent of operating profit.

Rutherford, a distributor of power tools and garden equipment, had an excellent year and moved to a larger distribution centre, which should improve efficiencies, according to chief executive Graham Dunford.

Prospects

Hudaco is a quality company that boasts a consistently high return on equity, decent operating margins and strong cash generation historically. The share does not seem expensive, trading at a forward price/earnings ratio of around 11 times, and two times its net asset value. The share price is also underpinned by a healthy dividend yield of 3.6percent.

Over the past two years the group has right-sized its operations to lower activity levels. Currently, Hudaco seems well positioned to benefit from an improvement in mining and manufacturing activity.

We remain optimistic that earnings will be supported by improved commodity prices. The group has a widely diversified customer and product base, which should assist in stabilising earnings.

Extracting operating efficiencies and synergies from recent acquisitions will also support earnings growth.

Amelia Morgenrood, BCom (Hons) Financial Planning. Member of the South African Institute of Stockbrokers.

The views expressed here are not necessarily those of Independent Media.

- BUSINESS REPORT